House prices among most expensive in the world, but no bubble

​New figures from the International Monetary Fund figures show Australian homes are among the most expensive in the world when house prices are measured relative to household incomes and rents are measured against prices.

The Andrew Roberts Fellow in Real Estate Economics,
Dr Nigel Stapledon, from UNSW’s Australian School of Business, has responded saying “there are two questions posed by this IMF data. The first is the long term story of why house prices are so high in Australia? It’s really because Australians live in just a few large coastal cities.”

He has compared similar large coastal cities in the US. There, rents and prices are also high as a share of income. As these cities have grown in population and incomes have risen, the location premium people are prepared to pay has risen. So you see in the US a substantial gap between coastal cities and inland cities – where the majority of the US population lives - which has grown over time. It does not mean that these coastal markets are vulnerable to a fall. It’s just the same as in Australia, however we don’t have the large inland cities too.”

He has also posed a second question - What can policymakers do about these high prices? “This is not really an issue for the Reserve Bank of Australia, but it is an issue for State Governments. Because, while demand has been a factor, supply restrictions have also been a significant factor in lifting the cost of housing in Australian cities.”

He has also responded to commentators who suggest this means we have a bubble which threatens the economy? “The short is No, there is no bubble.” he said. “Low interest rates have caused a logical decline in yields and supported a move up in prices.”

However he warns that investors expecting big capital gains to continue might be disappointed. “What we are seeing in response to the rise in prices is a lift in supply which, as it hits the market, will deflate the price momentum seen in the past 12 months. Indeed, that might already be happening,” he said.

Capital city prices recorded their first monthly fall in a year during May, according to data from RP Data-Rismark. Sydney's median house price fell 1.1 per cent in the month to $678,500 and Melbourne's dipped 3.6 per cent to $555,000.

“What we are not seeing is the development of the sort of supply or price overhang which precipitated the sharp decline in the US market during the GFC period,” he said.